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July 26, 2011

[A march here on July 1by protesters calling for more democracy and more populist economic policies drew 54,000 people, according to the final police estimate, and 218,000 people, according to the organizers. Mrs. Clinton offered unalloyed praise for Hong Kong’s strengths, and put them in the context of the system of one country with two economic and legal systems that China and Britain created when Britain returned the territory to Chinese rule in 1997.]

Secretary of State Hillary Rodham Clinton in China
on Monday, ending a five-nation trip.

HONG KONG — Secretary of StateHillary Rodham Clintonon Monday laid out an American economic agenda in Asia that emphasized broad international agreements over bilateral pacts, part of a wider theme of preserving American involvement in Europe and Asia.

In a speech here clearly aimed at Beijing, but avoiding explicit criticism of China, Mrs. Clinton, on the last leg of a five-nation trip, called for Asian countries to protect intellectual property and open their markets for government contracts. She urged them not to provide unfair advantages to state-owned enterprises or to draft market-shaping government regulations in secret.

The broader framework of Mrs. Clinton’s remarks was to emphasize a multilateral approach to economic issues in Asia that parallels the American effort to seek multilateral negotiations in the region on security issues.

On economic and security questions, the goal has been to prevent China from using its ever-growing power in the region to push its neighbors one by one into agreements that may serve Beijing’s interests and exclude the United States.

“There is now a danger of creating a hodgepodge of inconsistent and partial bilateral agreements which may lower tariffs, but which also create new inefficiencies and dizzying complexities,” Mrs. Clinton said. “A small electronics shop, for example, in the Philippines might import alarm clocks from China under one free trade agreement, calculators from Malaysia under another, and so on — each with its own obscure rules and mountains of paperwork — until it no longer even makes sense to take advantage of the trade agreements at all. Instead, we should aim for true regional integration.”

Mrs. Clinton called for regional economic integration to be pursued through groups that include the United States like the Asia-Pacific Economic Cooperation, whose annual gathering is to be led by President Obama in Hawaii this year.

Li Kui-wai, the director of the APECStudiesCenter at the City University of Hong Kong, pointed out that American support for multilateralism in Asia came after many years of American bilateral deals with Asian nations. These include the United States’s free trade agreement with South Korea now awaiting Congressional approval, which Mrs. Clinton also discussed.

But President Obama’s chairmanship of APEC this year does give the United States a chance to embrace a more multilateral approach in Asia, Dr. Li said.

Mrs. Clinton spoke here after spending the weekend at a security conference in Bali, Indonesia. At that conference, she and other American diplomats continued to support a collective Southeast Asian response to China’s assertions of sovereignty over most of the South China Sea.

Chinese diplomats have sought bilateral discussions on maritime sovereignty in the region and have strongly objected to having the United States play a role. This year’s security conference was less contentious than last year’s, however, as the foreign ministers of China and Southeast Asian nations agreed last Wednesday on guidelines for further talks.

Mrs. Clinton’s visits to Hong Kong and Indonesia followed stops in Greece, Turkey and India, where she also pressed for a continuing American role on issues like Greece’s debt troubles, for which the European Union has clearly led the international response.

After her speech in Hong Kong, Mrs. Clinton traveled by car across the border to Shenzhen in mainland China to meet with Dai Bingguo, a state councilor with broad authority over foreign policy, after which she was scheduled to fly back overnight to the United States.

Departing briefly from the Asian economy themes of her speech, Mrs. Clinton also offered an assurance that Congress and the Obama administration would find a way to raise the ceiling on thenational debt.

“The political wrangling in Washington is intense right now, but these kinds of debates have been a constant in our political life throughout the history of our republic,” she said, later adding that she was “confident that Congress will do the right thing and secure a deal on the debt ceiling, and work with President Obama to take the steps necessary to improve our long-term fiscal outlook.”

Chinese officials have been warily watching the debt debate in the United States. With more than $1 trillion inTreasury bonds, China holds roughly a tenth of the American national debt.

China’s precise holdings are unclear, as monthly data for foreign holdings of Treasury bonds are highly unreliable because the notes are frequently held in the names of various banks in other countries, while the most recent annual data is from last summer and is not fully comprehensive either.

Mrs. Clinton also spoke in Hong Kong to a gathering of the local branches of the American Chamber of Commerce and the Asia Society.

She praised Hong Kong’s commitment to free markets and light regulation. She conspicuously avoided any mention of the democratic aspirations of Hong Kong residents or their concerns about one of the world’s highest levels of economic inequality, which some local critics have attributed to limited regulation of oligopolies and real estate deals between large companies and the government.

A march here on July 1by protesters calling for more democracy and more populist economic policies drew 54,000 people, according to the final police estimate, and 218,000 people, according to the organizers. Mrs. Clinton offered unalloyed praise for Hong Kong’s strengths, and put them in the context of the system of one country with two economic and legal systems that China and Britain created when Britain returned the territory to Chinese rule in 1997.

China has objected strongly over the years to any American advice on how to run Hong Kong, contending that it amounts to foreign interference in China’s domestic affairs.

“Under the ‘one country, two systems’ policy, this remains a city that bridges East and West and looks outward in all directions, a place where ideas become businesses, where companies compete on the merits, and where economic opportunity is palpable and real for millions of people, a place that defines the fierce and productive economic competition of our time,” Mrs. Clinton said.

Albert Ho, the chairman of the Democratic Party in Hong Kong, said that he was “a little bit disappointed” that Mrs. Clinton did not mention democracy in Hong Kong during her speech, especially as she spoke right after she had met privately with four local lawmakers: Mr. Ho and Audrey Eu, the leader of the pro-democracy Civic Party, as well as two senior politicians from pro-Beijing parties.

Democracy in Hong Kong is important, Mr. Ho said in a telephone interview, because “it’s symbolic for possible change in China.”

[While the sky indeed may fall if the sides cannot compromise, the fact that the market has been calm has served only to deepen the resistance to a deal. People who perhaps should be worried don’t seem to be, and worse, appear to have stopped listening to the warnings.]

As Washington continues to debate a debt deal, the Obama administration has been preparing the country for the worst, with officials essentially saying the sky is about to fall.

But so far, oddly enough, nothing has happened. Despite warnings that a deal would need to be brokered by Sunday night before the Asian markets opened, stocks merely stumbled on Monday — the type of weakness usually associated with soft corporate earnings instead of an economic apocalypse.

Wall Street’s blasé response presents a serious challenge for the administration. The government has been ringing the alarm bells of an impending catastrophe to add urgency to its efforts to get Republicans to hash out a compromise.

President Obama, in his address on Monday night, again warned of dire consequences if a deal is not reached.

“We would risk sparking a deep economic crisis, this one caused almost entirely by Washington,” he said.

While the sky indeed may fall if the sides cannot compromise, the fact that the market has been calm has served only to deepen the resistance to a deal. People who perhaps should be worried don’t seem to be, and worse, appear to have stopped listening to the warnings.

How did it come to this?

The administration may have made a strategic mistake in warning too soon that the market would react negatively. It ultimately undercuts the government’s negotiating position because the doomsday scenario has not played out, even though the deadline is fast approaching.

“They have lost all credibility,” said Neil M. Barofsky, the former special inspector general for the Troubled Asset Relief Program. “It’s so typical of the wayTreasuryand the Fed treat everything — it is always to warn that Armageddon is coming.”

He has consistently held out Aug. 2 as the cutoff date for lawmakers to reach a compromise. After that, Mr. Geithner has said the government might not be able to continue sending outSocial Securitychecks orMedicarepayments. “On Aug. 2, we’re left running on fumes,” he told theCBSprogram “Face the Nation.”

He told me back in May that he was expecting to reach a deal by mid-July, way ahead of the final deadline. “Why would you want to experiment? In July, you’d want this done.”

But increasingly, the market seems to believe it was a false deadline. Some economists have said the government would have enough cash on hand to continue making payments for several days at least. The administration could also decide how to prioritize payments. The government, for instance, could opt to pay interest on Treasuries and put off other bills.

In other words, the United States has some wiggle room.

“The Aug. 2 deadline is not as hard as indicated by Secretary Geithner,” said Mohamed El-Erian, the chief executive of Pimco, the large bond manager.

It doesn’t help the government’s case that investors believe the debate over thedebt ceilingamounts to political posturing. Wall Street is counting on lawmakers to work out a deal, albeit at the last minute — a big reason the markets remain sanguine.

“The markets believe the political parties will reach a compromise agreement to avert a default,” Mr. El-Erian said, especially considering that they may have a bit more time on the doomsday clock.

Investors have good reason to ignore the drama. In years past, politicians have rubber-stamped an increase in the debt ceiling with little discussion or dissent. Since 1962, Congress has voted to increase the limit 74 times, according to the Congressional Research Service, a division of theLibrary of Congress. It happened 17 times under PresidentRonald Reaganand four times during the Clinton administration.

But investors may have been lulled into a false sense of security and, as a result, they may have missed the bigger picture.

Whether lawmakers reach an agreement about the debt ceiling may be beside the point. Republicans and Democrats are likely to comprise at some eventual date.

The question is how rating agencies will view the country’s creditworthiness, even if a deal is reached.

To some extent, that’s why lawmakers are wrangling over whether to pursue a stop-gap measure for the next couple of months versus a long-term plan.Standard & Poor’sthreatened that it would cut the United States rating if lawmakers didn’t come up with a “credible” solution.

“What I think is underappreciated until now is a possible outcome whereby the debt ceiling is increased, debt default is avoided, but one of the rating agencies feels compelled to downgrade America’s AAA because of insufficient agreement on medium-term fiscal reform,” Mr. El-Erian said.

If the country were to lose its vaunted rating, the federal government, companies, homeowners and innumerable others would see their costs skyrocket — a situation that would certainly send the markets into a downward spiral.